Federal Income Tax Considerations For HistoriansMilton L. Lovell |
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With the advent of every new year, many individuals reluctantly turn their attention to their federal income taxes and the process of completing the forms and calculations that properly report their income and expenses by April 15th. During this time, it is often easy to overlook various opportunities to reduce tax liability. There are several options available to historians that can make filing a tax return a much more rewarding experience. Business Expenses Professors, educators, historians, and other professionals may be able to deduct work-related expenses as itemized deductions from their taxable income. These work-related expenses include amounts incurred for business travel, entertainment, gifts, and other ordinary and necessary expenses. Itemized deductions are claimed on Schedule A to Form 1040, and are normally only claimed if the taxpayer's total itemized deductions exceed the taxpayer's allowed standard deduction for the year. Business expenses are allowed as a deduction if the total amount of miscellaneous deductions exceeds 2 percent of the taxpayer's adjusted gross income. Any meals and entertainment expenses are also subject to a 50 percent limitation. For more details, see Internal Revenue Code Section 162. Under the Internal Revenue Code, business expenses must be: incurred by a taxpayer in his or her trade or business; directly connected with the taxpayer's trade or business; and considered "ordinary and necessary" within the Internal Revenue Code. To be deductible, these expenses must be paid by the taxpayer and not the taxpayer's employer. Furthermore, expenses reimbursed by the taxpayer's employer are generally excluded from the taxpayer's income and are not available for deduction by the taxpayer. If a taxpayer incurs the expenses in the course of his or her performance of duties, not related to his or her job, but to an activity in which the taxpayer engages in as a separate activity--or a self-employed activity--these expenses can be deducted directly from a taxpayer's income from such activity, usually on Schedule C or Schedule C-EZ to Form 1040. Historians should be especially aware that expenses allowed as deductions include dues paid to professional organizations and public service organizations, amounts paid for subscriptions to professional journals, expenses incurred in attending business conventions and conducting research, and amounts for books and equipment, if the useful life of the books or equipment does not exceed one year. If a taxpayer has qualified expenses for books or equipment--such as a permanent professional library--and those books or equipment have a useful life of greater than one year, the taxpayer must capitalize the entire cost of the books or equipment and depreciate the total amount over the useful life of the asset. Depreciation is a cost recovery mechanism which allows a taxpayer to take a deduction each year over the useful life of the asset for the exhaustion, wear, and tear of property each year, based on certain predetermined formulas. The Job Creation and Worker Assistance Act of 2002 allows taxpayers to take an additional 30 percent first-year depreciation deduction, if the property is acquired after 10 September 2001, and before 11 September 2004, and the property is actually placed in service before 1 January 2005. There are numerous rules related to depreciation deductions, and a taxpayer should consult a tax advisor or other source of guidance before proceeding with a depreciation deduction. Congress added a deduction for eligible educators to deduct up to $250 in qualified expenses paid in 2002. This deduction can be claimed without itemizing deductions on a taxpayer's return. An eligible educator includes a kindergarten through twelfth grade teacher, instructor, counselor, principal, or aide who is in a school for at least nine-hundred hours during a school year. Educational Expenses A taxpayer may also be able to deduct work-related educational expenses if the education:
A taxpayer cannot deduct educational expenses if the education is required for the minimum entry level for the job or for a taxpayer to enter a new trade or business. These expenses are deducted as miscellaneous itemized deductions on Schedule A to Form 1040 and are subject to the 2 percent floor limit of the taxpayer's adjusted gross income. If a taxpayer is considered a self-employed individual, these expenses are taken on Schedule C to Form 1040, and are not subject to the 2 percent limit. Some of these educational expenses may also qualify for the Lifetime Learning Credit and the new tuition and fees deduction added for the 2002 tax year, neither of which require the taxpayer to itemize deductions. A taxpayer can only use these expenses for one of these options and should apply these expenses in the method which will best reduce the taxpayer's tax liability. Examples of these educational expenses include amounts spent for tuition, books, cost of research, transportation, and other travel expenses. These expenses can be incurred when the taxpayer is on vacation or temporarily away from his or her job--such as on a sabbatical--as long as the taxpayer returns to his or her job, usually within one year or less. Deductions taken for travel expenses as a form of education are highly scrutinized by the Internal Revenue Service. The Internal Revenue Code only allows deductions for these travel expenses in instances where the expenses for travel are necessary to participating in courses, research, or other activities and the travel itself is not the form of education. For more information, see Internal Revenue Code Section 274(m)(2). Home Office Expenses The deduction for home office expenses has evolved steadily over the last twenty years as the Internal Revenue Service has attempted to carefully craft a deduction and avoid abuses by certain taxpayers. In order to take a deduction for expenses related to the business use of part of a taxpayer's home, the "home office" portion must be: the principal place of the taxpayer's trade or business; the place where the taxpayer meets with patients, clients, or customers in the normal course of the taxpayer's business; or a separate structure, not attached to the taxpayer's residence, which is used in the taxpayer's trade or business. If a taxpayer has two places in which he or she conducts his or her business, the taxpayer must determine which is the principal place of business. A taxpayer cannot deduct expenses for any part of his or her residence used for both personal and business purposes. If the taxpayer is an employee, the use of the taxpayer's home must be for the convenience of the taxpayer's employer. While the home office deduction is often the subject of much discussion, the determination and use of the home office deduction is specific to facts and circumstances and it may be difficult to qualify to use the deduction when the taxpayer is an employee but may be more easily obtained, if the taxpayer conducts his or her own business. There are various Internal Revenue Service rulings and court cases which address various fact patterns and situations, including several circumstances involving professors and other educators. Other Deductions And Tax Planning Opportunities There are various other opportunities that professionals may take advantage of to reduce their tax liability. Deductions for student loan interest, investment expenses, charitable contributions, and other similar items are often overlooked by taxpayers but should be used if the taxpayer qualifies for the various deductions. In addition, taxpayers can take advantage of income deferral strategies such as Individual Retirement Accounts (IRAs) and pension and cafeteria-style benefit plans to reduce the amount of their taxable income. Resources There are various tax guides, tax preparation software programs, tax advisors, and other resources available to help a taxpayer obtain a better understanding of exactly what options are available to reduce tax liability. One of the best resources is the Internal Revenue Service's web site <http://www.irs.gov/>, which includes many Internal Revenue Service Publications and Forms addressing practically every income and deduction issue. The site is easily navigated and can prove invaluable when preparing the tax return. While assembling, preparing, and calculating an individual's tax return can be a daunting task, there are many options available to historians, which if taken properly, can reduce a taxpayer's tax liability and make this often dreaded experience much easier and more rewarding. Milton L. Lovell is an associate in the business practice group at Burch, Porter & Johnson, PLLC in Memphis, Tennessee. He concentrates his practice in business transactions and taxation. Lovell received his B.B.A. in Finance, magna cum laude, from the University of Mississippi in 1996 and his J.D. from the University of Mississippi School of Law in 1999. After working in the tax consulting group of a large public accounting firm in Memphis for two years, he continued his legal studies at New York University School of Law and was awarded a Master of Laws in Taxation in 2002. Lovell is a member of the Memphis, Tennessee, and American Bar Associations. He was admitted to the Tennessee bar in 1999 and to the United States Tax Court in 2002. For more information on this topic, join Milton L. Lovell and Timothy Huebner for "What Historians Need to Know About Filing their Tax Returns" at the OAH 2003 Annual Meeting in Memphis. The session will be held from 3:30 to 5:30 on Friday, 4 April 2003. |
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